A GOOD asset mix for savings is essential and particularly so when markets are moving in turbulent ways. Property – apart from one’s own home – is too often overlooked and yet should form part of an overall investment strategy.
Some achieve this through buy-to-let but often savers lack the effort involved or capital demands. Property funds are the clear alternative.
There are still some encouraging growth factors in the property market with a sizeable pick-up in mortgage lending with a 32-month high recorded in August, according to the Bank of England.
The UK’s leading provider of residential mortgages to professional landlords, Paragon, says rental income increased for the third consecutive quarter.
“Tenant demand has been growing for a number of years but in recent months it has accelerated considerably,” revealed Nigel Terrington, Paragon’s chief executive. Their survey shows that 49 per cent of landlords expect demand to further increase in the next 12 months.
A property fund may purchase shares in house-building companies and related fields – such as the student accommodation provider, Unite – and sometimes actual bricks and mortar.
This is an asset class where good positions can be taken both in the UK and abroad.
Despite patchy performance during the credit crunch, property shares regained some of their appeal in the second half of 2009 and picked up again last year.
Martin Payne, Leeds director at stockbrokers Brewin Dolphin, believes “there are still longer term attractions in this sector” although he expects most of the return will be income rather than capital growth.
The global growth property hotspots are London and major Asian cities, excluding Japan. In Europe, Germany, France, Benelux and the Nordic and CEE regions “show the most promising signs, offering stronger prospects and face lower risks”, said Chris Urwin, global research manager at Aviva Investors.
If the eurozone economy grows at a slow rate, it will impact on the property market. Therefore, powerhouses like Germany should be included in a continental property fund but the amount in Spain with its rising unemployment reduced.
Despite a lack of leadership from President Obama, the US commercial property sector reported positive returns for the sixth consecutive quarter. The world’s leading economy may have started its recovery phase which will mean a good time to be in the rental market for office, apartment and warehouse sectors.
With Asia Pacific leading the global recovery – not only strong domestic consumption but good export levels – demand for prime office space is evident.
Cities as diverse as Beijing, Hong Kong, Singapore and both Melbourne and Sydney in Australia have reported rising rental rates.
The Far East exception is Japan where the earthquake and tsunami have created uncertainty.
However, real estate in the medium to long term there should recover, particularly in Tokyo.
TR Property is one investment trust which takes a global view. Its assets include 26 per cent in France, nine per cent Dutch, seven per cent Swedish and five per cent German. Another diverse trust, TR Property Sigma, includes 16 per cent Germany, 11 per cent each Netherlands and Sweden, 10 per cent France, six per cent Austria and five per cent Finland.
Brewin Dolphin prefer closed-ended funds rather than unit trusts and open-ended investment companies as the former offer more liquidity which prevents mandatory closure in periods of market stress.
Payne warns that open-ended funds stopped savers realising their investments during the credit crisis with some yet to reinstate daily dealing. Closed-end generally have a lower charging structure and can be bought at a discount to net asset value.
Open-ended funds tend to hold prime assets around the UK but little in central London. Many hold high cash balances – sometimes up to 20 per cent – to meet redemptions and undertake no developments.
Over three years, the top performing investment trusts with their net growth (after deducting typical 3.5 per cent expenses), according to the AIC using Morningstar research, are:
n F&C Commercial Property, up 50.7 per cent;
n Macau Property Opportunities, up 43.9 per cent;
n ISIS Property, up 38.8 per cent;
n Picton Property Income, up 33.4 per cent.
All are eligible for inclusion in an ISA and SIPP.
One idea is to reduce volatility by taking out a monthly subscription. Alliance Trust Savings offer this facility for all investment companies through their self-select scheme from £50 monthly.
There are no initial or annual fees but a purchase charge of £1.50-20 and a one per cent sale fee.
Private client stockbrokers Bestinvest rate four open-ended funds with five stars: Henderson UK Property, SWIP (better known as Scottish Widows) Property Trust, M&G Property Portfolio and Schroder Global Property Securities.
The first three have similar portfolios of pan-UK prime assets with quality tenants and long leases.
They differ by how much each holds in central London and by cash weights. The Schroder fund invests in listed equities and is far more nimble in rotating between sectors and countries, making it favourite for Adrian Lowcock of Bestinvest.
The top performing open-ended funds over three years, according to Lipper research are:
n First State Global Property Securities, up 25.2 per cent;
n HSBC Open Global Property, up 24.3 per cent;
n M&G Global Real Estate Securities, up 21.8 per cent;
n Schroder Global Property Securities, up 17.4 per cent.
Yet there have been some disasters with losses of 83.7 per cent (HC Investments European Residential Property), 33.6 per cent (SkandiaGlobal Property Securities) and 27.4 per cent (Franklin Global REIT).
Primary Health Properties is tipped by Leeds-based Jonathan Baker of stockbrokers Charles Stanley.
The fund’s properties are let to GPs, PCTs and other NHS entities backed by the Government and there offer a very secure rental outlook. Over three years, Baker calculates the shares have shown a 29.4 per cent return.
Of the leading UK real estate funds, Bestinvest like Land Securities most for its prime central London assets and development pipeline. It has £10.5bn assets and annual rental income of £610m.
Hammerson is one of Brewin Dolphin’s tips. Almost 90 per cent of its assets are retail although this will reduce as new office developments come through. It has a market capitalisation of almost £39bn but trades at a significant discount.
They also favour Guernsey-registered ISIS Property Trust. It holds a diversified portfolio of UK office, retail and industrial commercial property and trades at a slight discount to net asset value, yielding eight per cent.